Download Market Structures

Market Structures
Structure -> Conduct -> Performance
Structure
Conditions
Perfect Competition
1. Many buyers and sellers
2. Homogenous product
3. Freedom of entry and exit
4. Perfect Knowledge
Monopolistic Competition
1. Many buyers and sellers
2. Product Differentiation
3. Freedom of Entry and Exit
4. Semi-perfect knowledge
Price
Price Taker – market determines
the price
Price
Little bit of Control – price takers
within brackets
Price Competition
Non-Price: product
differentiation, advertising,
product development
SNP
Methods of
Competition
Short Run
SNP
Oligopoly
1. Few suppliers
2. Pure-Homogenous ImpureDifferentiated
3. Barriers to Entry
4. Interdependence of Firms
Fair Degree of Control –
interdependent
Non Price: advertisement,
product differentiation, bundling
COLLUSION
Kinked Demand Curve
Game Theory
Prisoner’s Dilemma; alternative
strategies depending on
assumptions about rivals’
behaviour. Maximin/maximax
Monopoly
1. Only 1 Supplier
2. Differentiated or
Homogenous
3. High Barriers to Entry
4. Imperfect Knowledge
Price Maker – but still
constrained by the D-curve
No Competition
SNP – Same as Long Run
NP
NP



Loss
Loss
Collusion
Agree on price
Market share – physically
divide up the market
Marketing Strategies – level
of advertising, diff audiences
Formal Collusion is known as
cartels e.g. OPEC. High barriers
to entry are essential to ensure
the continuation of OPEC.
Tacit Collusion
 Dominant firm price
leadership
 Barometric firm price
leadership
Long Run
Equilibrium
SNP will attract more firms to the
industry, so market supply will
increase, bringing market price
down. This will persist until firms
only makes NP
Losses will encourage firms to
leave the industry, so market
supply will fall, bringing the
market price up, this will persist
until firm only makes NP.
Long Run Equilibrium is NP
SNP will attract more firms to the
industry, so market supply will
increase, bringing market price
down. This will persist until firms
only makes NP
Losses will encourage firms to
leave the industry, so market
supply will fall, bringing the
market price up, this will persist
until firm only makes NP.
Long Run Equilibrium is NP
Average Cost Pricing – profit
over AC for range of output, flatbottomed AC curve.
Price stickiness, kinked demand
curve shows why prices do not
alter even if costs shift
considerably.
Level of advertising and range of
goods produced act as a barrier
to entry.
Long run situation is exactly the
same as short run situation if the
BTEs hold up.
1. Economies of Scale – natural
monopoly and permanent
way
2. Brand loyalty
3. Network Effect
4. Lower costs for established
firms
5. Legal protection – Patents
6. Predatory pricing
Long Run
Industry
Falling Cost Industry – external
economies of scale, so LR supply
curve slopes downwards
Constant cost industry – where
there are no external econs or
disecons of scale, so LR supply
curve is horizontal
Evaluation
Efficiency
Rising cost industry, where there
are external diseconomies of
scale, so LR supply curve is rising.
 Allocatively and productively
efficient
 NP – no waste from society’s
POV
 Market is competitive, every
firm must be technically
efficient
 Responds readily to changes
in consumer demand
 No need to waste money on
advertising (homog. product)
 Incentive to be innovative for
additional profit in the SR
BUT
 No product differentiation
 No funds for R&D if only NP
 Internal econs of scale
means that PC will not arise.
Firms only make NP, no ‘wastage’ Inflationary situation, firms will
raise prices and a new kinked
Firms have spare capacity, AR
demand curve will emerge –
slopes downwards so firms will
could happen with one firm first
always produce below the
or many.
Technical Optimum. Spare Capac
to deal with increase in demand
7. Ownership/control of key
factors
8. Advertising and product
development – spend
excessively on advertising
and offer a wide range of
products in order to
discourage new competitors.
Firms do not operate at lowest
possible cost, P>MC

P>MC so there is allocative
inefficiency
 Not productively inefficient
since they operate to the left
of the Technical Optimum
HOWEVER
 Higher price is the price to
pay for diversity,
heterogeneous products
mean that markets
approximate to PC if
consumers are not bothered
by diversity and to
MonComp when they do – so
it’s different not better
 Dynamic market structure,
continually innovate for SNP
in SR.
 Is it like a congregation of
“mini monopolies?”

Oligopolies enjoy full benefit
of internal economies of
scale
 Funds for R&D from SNP,
rapid development of
products
 Product development – huge
variety
HOWEVER
 Wasteful spending on
advertising
 There is potential for
collusion and hence
exploitation of consumer
surplus; acts like a monopoly
Problems with oligopoly are
reduced if barriers are low, it
becomes a “contestable market”
and helps keep prices in check

Enjoys full economies of
scale
 Funds for R&D
 No need for wasteful
advertising
HOWEVER
 Allocatively inefficient since
P>MC
 Output is lower and market
price is higher than it would
have been under PC
 X-inefficiency (Leibenstein)
 Costs of acquiring or
protecting monopoly
position – Directly
Unproductive Profitseeking
(DUP)
 Inequality
Potential Competition –
Contestable Market
Legislation against monopoly
Examples
Appendix: Monopoly
Trust busting – good aspects are lost as well as the bad
1. Public ownership (nationalization): government takes over the running of the monopoly, decides output and prices. However- this solution doesn’t
have any competition and hence inefficiency can arise
2. Public regulation, separates role of producer and supervisor, allow efficiency of profit motive but prevents exploitation. BUT regulatory capture.